Ladies and gentlemen, thank you for standing by and welcome to the United Natural Foods Inc's Fourth Quarter Fiscal 2019 Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Steve Bloomquist, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining us on UNFI's fourth quarter and year-end fiscal 2019 earnings conference call. By now, you should have received a copy of the earnings release issued this afternoon. The press release, webcast and a supplemental slide deck are available under the Investors section of the company's website at www.unfi.com under the events tab. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer; Sean Griffin, our Chief Operating Officer; Chris Testa, President of UNFI; and John Howard, our Interim Chief Financial Officer. Steve and John will provide a business update, speak about our performance in the quarter and address our fiscal '20 outlook. We'll take your questions after management's prepared remarks conclude. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures, definitions and reconciliations to the most comparable GAAP financial measures are included in our press release. With that, I will now turn the call over to Steve.

Thank you, Steve. Good evening, everyone, and thanks for joining our fiscal 2019 year-end call. Looking back, this has been a very productive and transformative year for UNFI, despite some of the challenges and industry headwinds that we've been working to address. As you know, UNFI has a long history and takes great pride in having been at the very forefront of distributing better for you products for decades. We've taken important concrete steps forward on our journey to move to the next level by creating an unrivaled food distribution company that will continue to excel as both consumer preferences and the retail environment evolve. We have combined our natural and conventional businesses and are now operating as one company. We are now simply UNFI. The journey to fundamentally transform our business began several years ago, when we started closely assessing changes across the marketplace and asked ourselves a basic question, what will the wholesale and retail food businesses look like a decade out? We saw the acceleration of consolidation, changing consumer buying habits, the proliferation of better for you products, fewer store openings and retailers looking to combine their distributor relationships to improve their cost. Rather than label these factors as trends, we concluded that they signify dramatic shifts driving our industry to a point where scale, variety and services would be the keys to future success, and that led us to purchase SUPERVALU. Better for you products drive who we are and where we will grow. Now, with the one-year anniversary of the acquisition later this month, I feel it's important to begin with this overview of where we've been? Where we are right now and how we plan to win within the industry? The questions we continue to receive about synergy realization, financial execution and our strategy…

Thank you, Steve, and good evening, everyone. As Steve stated, I'll cover our fourth quarter financial performance, our year-end balance sheet and capital structure, our fiscal 2020 outlook as well as provide some brief comments on our updated long-term financial outlook. Let's start with our fourth quarter results, which included net sales of $6.41 billion, including $451 million from the additional week that was part of Q4. Excluding the extra week, fourth quarter sales increased $3.36 billion over last year, with net sales from SUPERVALU contributing $3.29 billion towards this amount. On a comparable 13-week basis, legacy UNFI fourth quarter net sales increased 2.8% over last year. The same year-over-year increase we reported in Q3 with modest by-channel changes. Full year net sales totaled $21.39 billion, which is just shy of our guidance range. Fourth quarter gross margin was down 167 basis points compared to the same period last year. As was the case for the past two quarters, and which will continue until we cycle the acquisition of SUPERVALU following the upcoming first quarter. The largest driver of our year-over-year rate decline was the mix impact of adding SUPERVALU's business and its lower gross margin rate. Excluding SUPERVALU, gross margin was up about 10 basis points, driven by improved vendor programs and lower inbound freight expense. Inflation in the fourth quarter was 1.6%. Fourth quarter operating expense as a percent of net sales improved 8 basis points from last year's fourth quarter, as the increase in depreciation and amortization expense driven by the acquisition was more than offset by the benefit of acquisition-related cost synergies. The mix impact of adding SUPERVALU, which operates at a lower expense rate and strong ongoing cost and efficiency drivers. Fourth quarter adjusted EBITDA was $166 million, up from last year's $85 million. This…

Thanks, John. I want to reiterate what I said at the top of the call. This was an exciting and productive year for UNFI, despite some headwinds. Even though, we faced operational challenges that took longer to address than we originally anticipated, we have the right strategy in place for UNFI to capitalize on the shifts in our industry over the near-term and the long-term. Our business model performs well when the economy does well, and as history has shown, when the economy softens. During this past year, we clearly saw some of the seeds of success. First, our integration work has gone well and we're firmly on track with our longer-term synergy estimates. The team has done a great job managing multiple work streams across the company, while not losing sight of the need to manage the business day to day. In fiscal 2019, the realized synergies came largely from eliminating duplicative costs across both organizations as well as leveraging our scale to negotiate lower costs in areas such as insurance, as we consolidate such programs. The next two phases of synergy realization are more dependent on simplifying the business through continuing our move to common systems as well as optimizing our DC network. The latter includes integrating natural and conventional inventory across distribution centers, which will begin later this year as well as distribution center consolidation planning, which is underway. Both will help from an operating efficiency perspective, but should also generate cash via either improvements to working capital or creating surplus property that can be sold. As you're aware, we began optimizing our Pacific Northwest distribution network. As part of that, our new Centralia, Washington Distribution Center is now operational and will be completely transitioned out of Tacoma, Washington by the end of this month. We've completed…

[Operator Instructions] And your first question comes of Rupesh Parikh, Oppenheimer. Your line is open.

Good afternoon, it's actually Erica Eisler [ph] on for Rupesh. Thanks for taking our questions. So you've highlighted some of the challenges at retail in recent quarters. So can you maybe talk about what you're seeing as we sit here today? Is it more of the same? Are the challenges accelerating? Are there any signs it's getting better? And what do you think really needs to happen for the retail backdrop to start improving here?

Sure, This is Steve, I'll start and I'm sure the team will weigh in. I don't think that there's anything material that's changed in this particular quarter. It's just the retail environment is still tough. Retailers generally are fighting to keep the consumers in the store. It's a much more competitive shopping environment. There's many more options for the consumer. We like to say that it's a great time to be a consumer of retail goods because there are so many ways to get it from so many different places. And again, it's -- from our perspective, it's another great reason why we did this acquisition, and that is to make sure that we had all the tools that retailers would need to bring down their cost, because that's ultimately what retailers need to do. They need to be competitive at the shelf. They need to have differentiation in the store. They need to have services to help them. And there is nobody in the marketplace that can do what UNFI does, and that is use the scale, travel less miles, sell more products, bring down the costs, be more differentiated, which ultimately will help the retailer succeed. The second part of the answer is that, as the economy shifts, so in other words, as people feel less confident about going out to eat. Obviously, the restaurants and food service generally is doing quite well. Then that will push more people back into the stores. And as that happens, it just becomes a natural tailwind for us.

Okay, great. And then just on EBITDA, obviously a lot of moving parts in this model. Is there anything you can talk about in terms of how we should think about the quarterly gains to be EBITDA for this year. Just any color you could provide here would be helpful, if there's anything that's an outlier that we should be thinking of. I think you can just maybe give some thoughts there.

Yes. I mean, we're not going to get into providing any quarterly guidance. I mean, if you wanted to take a look back over the last couple of years, you could look at the seasonal trends related to UNFI and SUPERVALU's historical EBITDA performance. But other than that, I don't think we could give any more clarity.

Okay, great. I'll pass it on.

Your next question comes from Andrew Wolf with Loop Capital Markets. Your line is open.

Hi, good afternoon. What was the LIFO expectation for the fourth quarter?

Yes, so we took -- we had about a $15 million additional LIFO charge in the fourth quarter. And really to make it comparable, right, because we -- SUPERVALU was always on LIFO. Natural was not. So the natural portion of the LIFO in the fourth quarter was -- how much was that--

$4 million.

About $4 million. So yes, it's about $4 million to $5 million that we didn't expect to have that we had in the fourth quarter.

Okay. And then if I understood that there is a lot of moving parts in the guidance, but you're not -- you took out the Shopper's EBITDA for 2020, but you left in Cub, but it sounds like you expect to -- you're pretty far along in the process to sell both of those. Is that right?

We are, Andy. But it's just -- it's really hard to know exactly when I mean, you could presume by the timing which one's going to happen first. And so I mean that's why we crafted the script the way we did. And so again, we had to draw a line in the sand, the line that we drew was one stays in, one comes out. And once we have color around when they're sold, we'll update you.

Yes, okay. I guess, given the numbers you've given us, we can back into the fact that Cub is a pretty profitable business. I think people intuitively knew that, but now we sort of have a sense of the numbers. So I guess do you -- it's reasonable to expect a valuation differential. I mean, Cub seems like a pretty fairly valued business?

You're talking about between Shoppers and Cub.

Yes. Obviously not the numbers they're going to get -- like the multiple.

Yes. They're -- it's considerably different.

Okay, And in the guidance, I think I heard $12 million of incremental EBITDA this year or 2020. From natural, does that mean the whole legacy UNFI, is that's a contribution or is that part of it? I didn't quite understand what was meant by that?

Sure, Andy. The $12 million is the anticipated EBITDA from the natural growth that we're expecting FY '20.

Meaning like organic growth or internal sales growth. I'm just trying to understand.

Combination. The combination of both.

Okay. But you're not saying this is what core UNFI is. You're not using natural like the natural business. I'm just trying to understand what you -- what that -- what you're trying to interpret?

So the nomenclature now is natural and conventional.

That's correct.

Okay. And I guess, again, I didn't do all the puts and takes, but it looks like if I were to take the fourth quarter, take out the extra week, annualize that simply, very simply, multiply by four. And then try to take your 2020 guidance and add back some things, it looks like you're looking for -- from the middle of the range, like low-single digit to 5% EBITDA growth, is that close?

Exactly. Yes, that's pretty close.

Yes. You're doing it well, Andy .

Okay. And what are the -- verses -- it sounds like you feel better about the out years. What is -- what would be lowering the EBITDA growth this year, if some of those are investments in the distribution centers? Doesn't sound like you're as worried about losing customers on a net basis. Can you just give us a sense of that?

Look, I -- we won't get into quarters or years. What I can tell you is -- we're absolutely thrilled that we're through 2019. As you might imagine, it was ungodly complicated and difficult and hard to unwind and tough on the company generally, but we're pretty much through it. So now what we look forward to is the migration to singular systems. Just incredible new customer experiences through being able to sell multiple products and deliver it on a singular truck, optimizing networks across the country. But we're still pretty early in the process. We're coming upon the one year anniversary. We still think it's just incredibly strategic on our part. But there's still a lot of work to be done. There's still some unknowns that we're trying to figure out our way through. But like I said earlier, we feel so fortunate to have been in a position to be able to do this because the market for sure is demanding it.

Yes. One quick follow-up, Andy, we can move on.

I'm all set. Thank you. Appreciate it.

Okay. Thanks, Andy.

Your next question comes from Karen Short with Barclays. Your line is open.

Hi, thanks. So just going to go to the synergy number a little bit. Can you maybe give a little color? Obviously you reaffirmed $185 million -- $70 million that you achieved in '19. And then you have in your slides this $44 million, but that's net of commercial investments. So can you just give me what the actual synergy number you're expecting in 20 years on an apples-to-apples basis and then maybe a little color on what '21 will look like -- look like basically the cadence on synergies?

Yes. So Karen, hey, it's Steve. So we didn't break down the synergy by year. What we did is we said, hey, we achieved over $70 million in '19, which was way beyond what we had communicated. What we also did is we confirmed that the remaining $185 million would be achieved by 2022. Correct? So we didn't break down when the balance of the synergy would take place, but we've got a pretty good true proven track record of being able to take synergies out sooner rather than later.

Okay. Sorry, I mean, I had kind of a $36 million-ish number for '19 and $82 million number for '20. So but okay, maybe moving on, what is the $44 million represent in terms of growth numbers that I should think about? And what exactly are the commercial investments?

Yes, so what we're trying to capture there is the incremental synergies that we're expecting in FY '20 above and beyond what we already recognized in FY '19, net of some commercial investments and some of that margin pressure that Steve and I both talked about in our opening comments.

And that's price concessions. It's new businesses. It's investments that we're making.

Okay. And then just wanted to talk a little bit about retail or the assets at retail. Can you maybe just clarify what the multi-employer liability is at retail? I know you kind of called in the case for SUPERVALU, the total liability at $35 million, but is that that's obviously not just retail. I'm kind of wondering because I think it does speak to maybe that's one of the things that is part of the negotiation in terms of Cub and Shoppers?

Yes. I mean, it's -- I would say that it's more of an issue on the Shopper side than it is on the Cub side. The Cub side is really small, well-funded. So it really is not an issue at all on the Cub side. That's what's made the Shoppers sale more complicated and it's taken more time. So I mean, that's how I would answer the question, not an issue for Cub at all. The more complicated issue for shoppers, but we'll work our way through it. It's taking more time.

Okay. And then a bigger picture, there was an announcement this morning in terms of Amazon obviously opening grocery stores more broadly, taking some major applications and things like that. Do you have any broad comments you can make on that? And then I just have one quick follow up after that.

Yes, I mean, obviously, we can't make any comment on any particular customer. Whole Foods, Amazon or anyone else. As I think we've said in the commentary, the top customers are actually continuing to grow. We haven't had a lot -- we haven't had nearly as many new store openings in the last year as we had in the prior years and that obviously is somewhat of a headwind. But we'll have to see what happens.

I would just comment that we will be well positioned, not just in the event that something were to occur in the instance that you described, Karen, but in any of the opportunities that are available with retailers going into dark real estate across the U.S. Our position in the market and proximity to this real estate opportunity is second to none.

Yes, as you might expect, with 60 distribution centers, we're closest to every consumer, every major market, and we have all the SKUs.

Great, okay. And then just last question. I mean, you did say in June that the Whole Foods contract and Amazon contract gets modified every five years. So that would be 2020. I just want to clarify that there could be some modifications beginning in 2020. And then on your debt maturity, I appreciate you don't have a lot of debt maturity maturing which is now on May '23, I guess. But you do have a balloon kind of payments happening right around the time that contract actually expires. So maybe any color you could give there to reassure.

Yes. So first of all, the contract -- whatever happens with the contract, we'll know way, way in advance of the expiration or the time that a balloon would be due. So I mean, because with those things, as you said, always get negotiated five year -- typically five years out. Sean do you want to…

Yes. I would just -- I would suggest that it's not necessarily a modifier. The historical cadence would suggest that some time in advance of the expiration of the contract, it has typically been five years, we would engage in discussion. But of course our contract goes until 2025.

Yes. And the reason why we do that, Karen, is because obviously when you deal with an amendment in any customer or contract in any customer, a lot of things change over five years. The supplier network changes, programs change, the macro environment changes. And so that's generally why we would both choose to say, hey, is the agreement -- any agreement reflect what's currently happening in the marketplace.

Got it, that's helpful. Thank you.

Your next question comes from Kelly Bania with BMO Capital. Your line is open.

Hi, good evening. Thanks for taking some more questions here. I was curious if you could just go into the discontinued ops, and I think the comment was $32 million from the Shopper's divestiture. Is that an annualized number? And then can you just explain exactly how much you're expecting from the Cub contribution to discontinued ops this year?

Sure. So the $32 million does represent the EBITDA that we had in FY '19 and what we're -- what we pulled out for FY '20 guidance purposes. As for Cub, I think as Steve has already mentioned, we've covered as much as we can on that at this point.

Yes, Kelly, as soon as we get more color around valuation timing, we'll give you an update.

Yes. No, I wasn't trying to get the expected proceeds. I was more just kind of just doing the math. It looks like it's a $100 million or so in EBITDA. Is that the ballpark?

There are some other smaller things in discontinued operations, so that you can't necessarily triangulate it that way.

Okay. So are you willing to help us out with, because I think you made the comment that when that happens, EBITDA would go down and then you would get back to a 5% kind of targeted growth rate. So I was just curious, if you could kind of help us out understanding what that magnitude of what that would be?

Why don't you let us think about that a little bit and we'll come back on that question.

Okay. And I guess in terms of the $200 million to $300 million in expected debt pay downs, can you help us understand how much from cash flow from operations is going towards that debt pay down?

Sure, we're thinking roughly in the $40 million to $70 million range from free cash flows for FY '20.

Okay. And maybe just an update -- just after almost a year here, just an update from what you're hearing from your customers in terms of service levels and how they're -- how they're feeling about the combination. We haven't heard about service levels in a while, so just wanted to get an update on that.

Kelly, this is Chris. So actually, in past quarters, we've talked about vendors having a hard time keeping up with supply. We actually saw a nice uptick in Q4 on that. So our service levels have actually improved in the last quarter, as this -- these things tend to work in cycles, as we said before and we had a nice uptick to about 177 bps improvement on vendor out of stocks from the year prior, so that was good. So service levels, the way we're servicing the customers, the service levels that we're achieving are very strong and just to your second question and how our customer's feeling about this combination, to Steve's earlier point, we got in front of 6,000 customers, conventional customers at the end of July. And the resounding feedback was, they see the opportunity. They're looking for solutions and they see the opportunity for UNFI to provide them.

Yes. Kelly, I would also add that we did have some stumbles last year on the outbound service side. That is the delivery of product from our DCs into the retailers, and those were almost exclusively associated with the companies that SUPERVALU had acquired prior to the time that UNFI acquired SUPERVALU, and they required a great deal of UNFI's involvement and we talked about Harrisburg. We talked a little bit about Florida. We talked somewhat about the Pacific Northwest and the standardization. And we are well on track towards pretty drastic improvement and stabilization in the vast majority of those markets. We still have some work to do, but we feel good about where we've been and where we are.

Yes, I would say that there's always work to do. We always have work to do. And Steve actually in his comments mentioned Harrisburg specifically. And we did reassign supply agreements with two of our largest customers out of Harrisburg. And we talked a lot about Harrisburg in previous quarters. So we're not really talking about Harrisburg as it relates to service. We're talking about Harrisburg as it relates to growth, which we feel really good about.

Thank you.

Your next question comes from Chris Prykull with Goldman Sachs. Your line is open.

Good evening, guys. Thanks for taking my questions. I just wanted to go to the EBITDA walk from '19 to '20, specifically the $57 million of incremental contribution from the 12 weeks at SUPERVALU wasn't in the results from last year, I think that's about 27% below the number that you provided at the Investor Day of $78 million. Is that the right way to think about the trajectory of that core SUPERVALU business?

Can you say that again? I don't think we followed that.

Yes. So the $57 million of -- from the 12 weeks that SUPERVALU wasn't in there last year, that will be in there this year -- you've provided $78 million number at the Investor Day sort of 27% delta between those two numbers. Is that the right way to think about the trajectory of EBITDA for the core SUPERVALU business?

So, yes, this is John, I can't comment on the $78 million and what was provided, I don't remember seeing that number from the Investor Day. However, no -- the $57 million is the amount that we believe we've estimated to be the SUPERVALU piece in FY '20 that is not reflected in our FY '19 numbers.

Got it. Maybe I'll follow up offline. I guess as a follow up, when you said you expect mid-single digit EBITDA growth in '21 and '22 on low-single digit sales growth, how should I think about bridging that margin delta. Is it really just for the remaining synergies? What are the assumptions for the core business?

Yes, I think it is going to be largely the remaining synergies offset by some of that margin pressure.

Yes. I think that we're obviously planning to get our heads around more cross-selling wins, more new customers coming on board and being laser focused on having profitable business first as opposed to any business at all costs. And that statement is certainly embedded in our overall revenue growth that we certainly believe and we have a pretty good process that says, we only have one method of service and that is a high level of service. And so where we have programs that are not delivering the returns that we need and we're going need to take action. Now we've been doing that, but we will continue to do that throughout the next couple of years. And I just wanted to make another comment back to your question about Investor Day, because I think you bring up a pretty good point. And that is there is generally a pretty big difference between the outer year numbers from the January Investor Day and where we are. And so I think for us, as a management team, 2019 was a humbling year. I mean, it was a really hard year and we learned a lot. But at the end of the day, we believe that we have the ability to look around the corner to see what was coming and take action to ensure that the company had a long term play and the ability to be the number one player in the marketplace as the entire environment evolved. So what happened? Well, I think the industry headwinds turned against us. So just bad timing. I think that we underestimated the complexity of the integration associated with the companies that SUPERVALU had previously purchased. And we had a couple of -- kind of accounting related one-offs like LIFO which makes complete sense from a tax perspective, some sale leaseback, some workers comp that all contributed to kind of this lower number. But look, we're excited about where we are. We don't like underperforming in a year, but we feel good about where we are. We think that the net result of 2019, especially in the fourth quarter, got us pretty close to where we thought we were going be. And it gives us the opportunity to set off into 2020 and running with one company trading as UNFI, one sales team, four regions and off we go.

Great, Steve. Thanks so much, that was really helpful. And if I could sneak one last one and I know we're over time. But the stranded costs that are sort of stuck within the consolidated or continuing ops P&L as you sell those retail assets. What's embedded in the guide for those stranded costs for fiscal '20?

I don't know the answer. Back to you.

We have to split them up. I think for Shoppers there will be a small amount embedded in there. But for Cub, since we've included the entire full year of EBITDA in our numbers, we have the entire full year of some of the stranded costs as well.

And what is that full year number?

I don't know.

We'd have to go through and calculate the entirety of that number.

Are you talking about the math? Or are you talking about something different when it relates to stranded costs. What do you specifically address?

I think so at the Investor Day, I think you said in fiscal '19, there was about $80 million of stranded costs sort of above the line, if you will, that were related to disc ops. I'm not sure if that's if you have to annualize that number to get to a 2020 number or there's some lease expenses in there as well as some other items?

This is rent expense, you're right.

There's some admin costs, but a majority of this is rent expense that will go in those banners go.

Yes. Well, we have to look at that one more specifically, I don't think we're prepared to answer that today, because it's certainly not a pension issue, certainly not a Cub, as I said earlier. But we'll take a look at that one. I also wanted to go back to the question about Cub and EBITDA related to cub. One of the reasons why we're so hesitant to do that right now is because we are in a process. We do have an off -- a memorandum that's been distributed to a wide range of parties who have signed an NDA. And I think it would be unfair to publicly talk about Cub's EBITDA at this particular point in time.

I think we have one more question.

Yes, your last question comes from Eric Larson with Buckingham Research. Your line is open.

Hey guys, I know we're running overtime. When I look at your full year, one of the things that I've been pushing hard on your free cash flow number is, was your working capital and your full year numbers, you did a really good job with receivables and inventories, but it seemed like there was some slippage, you gave a bunch of that away in your current liabilities. Is that -- will that reverse over time or how should we look at the efficiency of your working capital over the next year or two? It seems like there's good opportunity there, but it didn't show -- I don't think that much in the current year?

When you're saying current year, you mean -- you're talking about '19?

Yes. I'm sorry. Yes for '19, correct.

Yes, so the way I would think about that is we did make progress, as you said, on the receivables and inventory and that helped drive some of that excess cash we used to pay down that debt in Q4. I agree there is an opportunity in [indiscernible] and there's an opportunity throughout -- all of the working capital to drive some improvements. And we are continuing to do that with our operation leaders etcetera, to get those improvements. A lot of the improvements in the receivable and inventory that we saw at the end of Q4 will be -- we're trying to sustain that going into FY '20 make sure we don't go backwards and we're going to continue to look for the opportunities on the payables side and continue to where we can improve the receivable and inventory.

Got it. One just other quick follow up, adoption of 338, your effective tax rate is, I think you're looking at it this year at about 29%. Will the tax benefits of that show up almost all exclusively as cash taxes or would you also get a benefit of a little bit lower effective tax rate with the adoption of 338?

Good question. With 338, that will be largely cash. There will not be a great benefit in that.

Okay. Thank you.

Any concluding comments, Steve?

Sure, yes. No. Thank you, everybody, for joining us today. We really appreciate the time. As I said earlier, we got through a pretty tough year in 2019. I'm incredibly proud of this management team and their ability to just grind it out and get it done; and we've got a great team in place to drive success throughout 2021 and 2022. Thanks again and we'll talk to you soon.

This concludes today's conference call. Thank you very much for joining us. You may now disconnect.